Is your retirement just around the corner and you’re concerned on where you’ll be able to derive your monthly income? You may have a pension,or you may have Social Security, but if you are retiring early then you’ve most definitely been more diligent in your investment tracking and you know that these might not be an option for you to tap into. You have your IRA and your 401(k), but by what you’ve been told, if you touch it, you may have a 10% early withdrawal penalty. As much as you’ve seen your accounts deplete in the last 15 months, you have no desire in giving the IRS any more money than you already have with all of the bailout programs.
For some of you, you’re in luck. There are some strategies that allow tap into retirement plans to take distributions without incurring the 10% penalty. Here are a few options that will allow you to touch your retirement plans and avoid that 10% penalty.
Obviously, you don’t get to enjoy this benefit. But it does benefit your family in the event they need some of the money to help with expenses after your passing. This is a good time to review your beneficiary elections on your 401k to make sure you have everyone listed that should be.
If and when someone has an accident or is diagnosed with a condition that gives them a permanent disability, it can be quite scary when it comes to paying the bills. If you have a permanent disability you can withdraw from your 401k early and get the money you need. You’ll have to provide a disability letter to your 401k custodian so that they will not hit you with the 10% penalty.
3. Medical Expenses
Medical expenses are another event that may allow you to touch your 401k penalty free. Be sure to check with your plan document to make sure so see what medical expenses are covered.
4. 55 and Separated From Service
If you have retired early and are at least 55 years of age, you are in luck. You can take a distribution from a qualified defined contribution plan, i.e. 401(k), and avoid the 10% penalty. A couple key things to note on doing this is that it must be from the 401(k), 457 or 403(b), to avoid the 10% penalty. If you have already done a 401(k) rollover into a traditional IRA, you have already missed this opportunity. Once you hit the IRA and you take a withdrawal, you are then assessed a 10% penalty and given a larger gift than you needed.
5. Welcome to 72t.
Another more complex strategy to avoid the 10% penalty is the rule of 72(t). The rule of 72(t) states that withdrawals from your 401k have to be “substantially equal periodic payments. You must use one of the three methods that the IRS has determined and then take your payment on a set schedule for a specific time period. It is required that you take those payments for either 5 years or when you turn 59 1/2 , whichever comes later. For example, if you start taking your payments at the age of 52, then you must do so for 8 years. Someone who starts at 57, must do so till the age of 62. Also read a previous post that addresses the 72(t) distributions.
Keep in mind 72(t)strategy may not always be suitable. An advisor, or a tax or legal professional, can help identify the best course of action to incorporate the best investment services.